The Hindu Business Line : Govt fine-tunes Banking Act — Banks to be allowed to issue pref shares

IN a major fine-tuning of the Banking Regulation Act, the Government on Wednesday introduced a Bill in the Lok Sabha that seeks to stipulate minimum capital requirements for all banking segments, besides laying down procedures for merger of non-banking finance companies (NBFCs) with banks and allowing banking companies to issue preference shares.

The Bill also proposes `freezing' of all regulatory exemptions currently enjoyed by co-operative banks under the Banking Regulation Act , thereby bringing the regulation of the sector at par with that of commercial banks.

The Banking Regulation (Amendment) And Miscellaneous Provisions Bill, 2003, also proposes to empower the RBI to remove the Chairman of a co-operative banking society and to supersede the board of a banking company or banking co-operative society.

The Bill, that was introduced by the Finance Minister, Mr Jaswant Singh, was partly prompted by the recommendations of the Joint Parliamentary Committee that had desired a level-playing regulatory field for commercial banks and cooperative banks.

A minimum Rs 100-crore paid up capital requirement has been prescribed for domestic banking companies and foreign banks. A local area bank would require a minimum capital of Rs 5 crore, while co-operative banking societies would require Rs 15 lakh.

However, the RBI would have the freedom to hike the capital requirement. The present Act provides a minimum paid up capital varying between Rs 50,000 to Rs 20 lakh depending on the location where the banks are registered.

The Bill also proposes to allow banks to issue both irredeemable or redeemable preference shares, in addition to ordinary shares. However, the holders of preference shares would not be entitled to voting rights.

Any acquisition of shares amounting to 5 per cent or more of a banking company would require the prior approval of the RBI.

The RBI would also have complete leeway in prescribing statutory liquidity ratio requirement with the Bill proposing to scrap the legislative cap of banks maintaining a minimum of 25 per cent and a maximum of 40 per cent of their demand and time liabilities in cash or gold or unencumbered securities.

Making existing licensing requirements for banking companies applicable to co-operative banks, it has been proposed that no co-operative banks would be allowed to carry on business without the licence after the passage of three years after the enactment of the amendments.

The Bill has sought to add a new provision allowing the amalgamation of non-banking financial companies with banking companies on the same lines as between two banking entities. It also provides for amalgamation of one banking co-operative society with another banking co-operative societies. While prohibits a director of a bank to sit on the board of another bank, the bill also bars connected lending involving lending to related persons and associate companies by the banking companies or banking co-operative societies.

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